Question

Batman Motors, Inc. (BMI) sells both new and used cars and also provides car repair and maintenance services. BMI is 100% owned by Robin, an individual. BMI buys its cars using a line of credit from Little Penguin Bank. The LoC requires monthly payments of interest. The interest payment is due on the first of each month for the prior month’s interest. Interest expense through the end of October was $525,000. At the end of November, BMI’s principle on the LoC was $9,585,000 and the interest rate for November (it is a floating rate based on the US prime rate) was 6.5% annually. At the end of December, the balance on the LoC was $10,750,000 and the interest rate had reset to 6.25%. Each June 30^th, the LoC is “refreshed” with a new LoC where the old one is paid off and a new one is implemented.

BMI offers extended warranty products to the buyers of used cars. The warranty lasts for 1 year or 15,000 miles, whichever comes first and covers 100% of any non-routine maintenance and repairs. The cost of each warranty is $2,500 per vehicle. Buyers are not required to purchase the extended warranty, but are highly encouraged by the sales people and the finance people who work for BMI. BMI expects to incur, on average, $925 of costs in the future per used car sold.

Buyers of new cars can also buy “care packages” for their new cars which cover 100% of routine maintenance and any repairs not covered by the manufacturer’s warranty. Generally, this package covers a 1 year period from the date of purchase of the new car and costs $4,250. If the buyer chooses, the amount can be included in the overall purchase of the car and financed as long as the financing is done through Batman Motor Credit (BMC). The expected cost of providing these services on a per car basis is $1,750.

BMI does business in the Elk Grove auto mall in Elk Grove California. California also requires registration and DMV fees to be collected and remitted by BMI directly to the state. For both new and used cars, the state requires 9% of the car purchase cost to be collected and remitted as fees/registration. BMI has 10 days after month end to calculate and remit the total amount collected for the fees/registration.

BMI has three general types of employees and each group is compensated differently. The first group consists of sales people who are paid based on a flat fee of $60 per car they sell plus a commission of 8% of the agreed upon sales price. Commissions are paid on the 15^th of each month based upon the prior calendar month (i.e. December sales commissions will be paid on January 15^th). Sales people do not accrue any vacation, but are considered employees.

The second group consists of the mechanics and other service related personnel. These folks are paid hourly and average hourly pay for this group is $45/hour. Service people accrue 2 weeks of vacation annually and are limited to a maximum accrual at any one time of 10 days of vacation. Vacation is paid only when an employee either leaves the company or takes their time off in a subsequent year. There are 15 service people employees, 12 of whom have maxed their accrual. The other three have used all of their earned vacation. BMI’s service department is open every day except Sunday, but no one is allowed to work more than 40 hours per week to avoid overtime costs.

The third group consists of the remainder of the administrative team, including the finance folks and any other people necessary to running the overall business. There are 10 of these people and each of them is paid a fixed salary. Average monthly salary for this group is $150,000. All of them earn more than the Social Security wage limit. These folks get 15 days of vacation per year, and all of them have maximized their accrual at the end of the year.

As Robin is the sole owner of BMI, but does not do any actual work for the Company, she takes money out of the corporation monthly to help pay her personal expenses. Her monthly distribution is $25,000 and is paid on the 10^th of each month. Her legal team has advised her to make sure to document this transaction every single month in the monthly corporate meeting minutes.

The local utility bills BMI on the 18^th of each month for the prior month’s use of electricity, water, garbage and all other public utility costs. The actual bill received in January of the prior year was $2,200. BMI has not done any expansion during 2018. BMI’s average utility bill for each month was $2,350.

In January, a local law firm served notice to BMI that it had been retained by an individual who had purchased a used car from BMI and that was involved in an accident on December 28, 2018. The plaintiff is suing for physical, emotional and other damages totaling $1 million. BMI has passed the notice on to their outside lawyers but plans on vigorously contesting the suit on any grounds available.

Because it is December, BMI has also sold a significant amount of gift cards. The gift cars are sold in minimum increments of $100 and are redeemable only for services, not against purchase of vehicles. During December, BMI sold 1,300 gift cards and had 365 redeemed for services during December, and another 375 redeemed in January. At the beginning of December, the un-redeemed gift cards totaled 975 cards (all of which were sold during 2018), of which 120 were between 12-15 months old. BMI’s policy is to begin breaking gift cards after the card is outstanding for 18 months.

During December, BMI sold the following number of cars:

Used cars sold:    180

Average used car sales price    $10,975

Extended warranties purchased:     169

New cars sold:           270

Average new car sales price:    $32,450 before tax, license, and other

Care packages sold     200

Because BMI met its target sales for the year, the President of BMI was awarded a bonus of $125,000, payable at the end of January after all of the audit work is done to confirm the total sales during the entire year. The President is part of the administrative team.

Robin understands the value of an audit of the financial numbers, so hires an outside auditing firm to ensure that the financial statements are correctly stated under GAAP. She agrees with the firm to complete the audit by the end of January 2019 and pays in advance for ½ of the agreed upon total fee. The total fee for the audit is $54,000. The remainder will be paid upon delivery of the auditor opinion as part of the financial statements.

November ending balances, if you need them: extended warranty $145,000; care package liability $295,600; Deferred revenue $975,000; accrued vacation $375,000.

REQUIRED:

1.Calculate and present all journal entries necessary based on the above information. To receive credit, you MUST show all of your work (showing me your formulas is not necessary) and a journal entry in proper DR and CR format, including an explanation for the entry.

2.Calculate and present the income statement accounts for the month of December and the balance sheet accounts as of December 31, 2018. You do not have to present a balanced balance sheet, as you do not have sufficient information for that.

Answer 1

Details	Qty	Sales Price	Sales Value
Used Cars	180	10975	1975500
Extended Warranty	169	2500	422500
Total Sales Realisation			2398000
Fees to State(9%)			215820
Future cost of warranty	169	925	156325

New Cars	270	32450	8761500
Car Packages	200	4250	850000
Total Sales Realisation			9611500
Fees to State(9%)			865035
Future cost of Services	200	1750	350000

Date	Particulars		Debit($)	Credit($)
31.12.2018	Interest Expense		57986.46
	Interest Payable			57986.46
	Being Interst Accrued on LOC Balance of [email protected]%/12 + Amount drawn during December of [email protected]%/12 per month
31.12.2018	Bank Account		1165000
	LOC Account			1165000
	Being Amount drawn during December of [email protected]%/12 per month
1-31 Dec'18	Bank Account		2398000
	To New Car Sales			2398000
	Being amount realised onm sale of new cars
1-31 Dec'18	Bank Account		9611500
	To Used Car Sales			9611500
	Being amount realised onm sale of Used cars
31.12.2018	Prepaid Warranty Expense		143297.9
	Warranty Expense		13027.08
	To Warranty Payable			156325
	Being warranty expense booked on sale of 169 new cars
31.12.2018	Prepaid Package Expense		320833.3
	Package Expense		29166.67
	To Package cost Payable			350000
	Being Package expense booked on sale of 200 Used cars
1-31 Dec'18	Bank Account		1080855
	To Fees Payable			1080855
	Being Fees collected to be remmited to California state for sale of New&Used Cars
10.01.2019	Fees Payable		1080855
	To Bank Account			1080855
	Being Fees remmited to California state for sale of New&Used Cars in Dec month
31.12.2018	Sales Personnel Salaries		27000
	To Salaries Payable			27000
	Being Flat Fees of $60/Car sold booked
31.12.2018	Sales Personnel Salaries		858960
	To Commission Payable			858960
	Being 8% Commission Payable to sales personnel
31.12.2018	Salaries- Service Employees		2400
	To Salaries Payable			2400
	Being Salaries booked for 15 Service employees
31.12.2018	Salaries- Service Employees		960
	To Salaries Payable			960
	Being 12 Employees Vaccation accrued for 2 weeks
31.12.2018	Salaries- Admin		1500000
	To Salaries Payable			1500000
	Being Salary Booked @$ 150000 per employee for 10 members
31.12.2018	Salaries- Admin		375000
	To Salaries Payable			375000
	Being 10 Employees Vaccation accrued for 15 days
10.12.2018	Drawings Account		25000
	To Bank Account			25000
	Being amount Drawn by Robin
18.12.2018	Utility Payable		2350
	To Bank Account			2350
	Being Utility expense paid for Nov month
31.12.2018	Utility Expense		2350
	Utility Payable			2350
	Being Utility bill booked for Dec month
31.12.2018	Audit Fees		54000
	To Audit firm			54000
	Being Audit fees booked for 2018
31.12.2018	Audit Firm Account		27000
	To Bank Account			27000
	Being 50% Audit fees paid as Advance

Income & Expenditure Account

Expense	Amount($)	Income	Amount($)
Interest	57986	New Car Sales	2398000
Warranty	13027	Old Car Sales	850000
Package cost	29167
Salaries -
Sales Personnel	27000
Service	3360
Admin	1875000
Commission	858960
Utility	2350
Audit Fees	54000
Net Income	327150
Total	3248000	Total	3248000

Balance sheet for year ended 2018

Liabilities	Amount($)	Assets	Amount($)
LOC	10750000
Extended Warranty	301325
Package Liabilty	645600	Deferred Revenue	975000
Audit Fees Payable	27000
Utility Payable	2350
Salaries Payable	1530360
Commission Payable	858960
Accrued Vacation	750000